Goldman predicts where the stock market is headed in a ‘hard landing’ or other economic scenarios

Published Thu, Oct 6 202211:18 AM EDT

With more uncertainty ahead for investors, Goldman Sachs' David Kostin outlined two potential scenarios for markets in the near term, with one forecast anticipating the S & P 500 could fall as much almost 17% from Wednesday's close. Kostin, Goldman's chief U.S. equity strategist, outlined a soft and hard landing scenario in a note to clients this week that he says could play out in 2022 and into next year as the Federal Reserve hikes rates and struggles to control surging inflation. The strategist expects the closely watched consumer price index to finish 2022 at 6% before falling to 2.9% by the end of next year. Goldman's soft-landing scenario anticipates rising yields and the market's forward price to earnings ratio falling to 15 times, with the S & P dipping modestly, by about 5% to 3,600 from Wednesday's close. That outcome expects the index to hover near the 3,600 level by mid-2023 but hit 4,000 by the end of next year. By contrast, Goldman's hard landing play anticipates roughly another 17% drop from Wednesday's close, down to 3,150 by the middle of 2023. That would amount to a 34% draw down from the S & P 500's peak to trough. The index should, however, end 2023 at the 3,750 level under this scenario. Citi's Nathan Sheets on Thursday also outlined a number of scenarios the bank expects for the global economy. Citi's base case assumes earnings per share growth will fall by 5% in 2022 compared to the consensus 6% growth estimate. Citi's soft landing scenario for 2023 expects 6% EPS growth, while a hard landing would see EPS fall by 18%. "Our base case — which envisions a series of rolling country-level recessions but not a synchronized global downturn — implies that bottom-up consensus [2023] EPS forecasts are still 11% too high," Sheets said. Amid this uncertain tightening cycle with an inevitable slowdown of some variety ahead, Goldman's Kostin says investors should search for stocks with quality factors, including low volatility, strong balance sheets, and a strong return on capital. One way to play this strategy is through Goldman's 50-stock quality basket incorporating many of these principles. The group includes names including Alphabet , T-Mobile , UnitedHealth and Dollar Tree , which together have outperformed the S & P by about 1 percentage point this year. — CNBC's Michael Bloom contributed reporting